Aviva Scraps Bonuses, Freezes Pay After Cutting Dividend

By Kevin Crowley -
Mar 7, 2013

Aviva Plc (AV/), the U.K.’s second-biggest
insurer by market value, will cut directors’ bonuses to zero and
freeze pay for 400 top managers after slashing its second-half
dividend by 44 percent and posting a loss. The shares plunged.

The insurer will pay a final dividend of 9 pence a share
for 2012, down from 16 pence in the previous year, the London-
based firm said today in a statement. That cut the total for the
year to 19 pence a share, less than the 25.4 pence average
estimate of 23 analysts surveyed by Bloomberg.

“These results look ghastly,” Marcus Barnard, a London-
based analyst at Oriel Securities Ltd. with a hold rating on the
stock, wrote in a note to clients. Chief Executive Officer Mark Wilson, 46, has cut the dividend “as much as possible to a
lower level, from which it can grow.”

Wilson, the former CEO of Asian insurer AIA Group Ltd. (1299) who
took over at Aviva at the start of this year, is selling assets
to rebuild capital buffers depleted by the European sovereign
debt crisis. Disposals of units in the U.S., Russia, Malaysia
and the Netherlands are depriving the insurer of the cash flow
it has used to generate an average dividend yield of 8.3 percent
in the past 12 months, the seventh-highest in the benchmark FTSE
100 index, according to data compiled by Bloomberg.

Net Loss

The insurer posted a net loss of 3.05 billion pounds in
2012, following a 3.3 billion-pound writedown on the U.S.
business it agreed to sell to Leon Black’s Apollo Global
Management LLC (APO) in December. Operating pretax profit dropped 15
percent from a year earlier to 2.13 billion pounds.

Aviva said it will also remove its dividend in stock. The
company’s “overall situation” means executive directors won’t
be awarded bonuses for 2012, Wilson said.

“Whilst we have enough liquidity to pay the current
dividend level, the cash flows from the businesses are too tight
to sustain that historical level,” he told reporters on a call.
“It’s like walking up an escalator that’s going down -- it’s
possible to climb up but eventually the escalator wins.”

The disposals have cut Aviva’s ability to generate cash
that was used to pay its dividend, Alan Devlin, a London-based
analyst at Barclays Plc (BARC) with a sell rating on the stock, said
before the announcement. The firm would only have been able to
fund the payout from recent asset sales, meaning it would be
unsustainable in the long-run, he wrote in a March 5 note.

‘Swiss Clock’

RSA Insurance Group Plc (RSA), the U.K.’s biggest non-life
insurer by market value, plunged as much as 15 percent last
month after it cut its dividend by a third, citing a “prolonged
low bond yield environment” that hurt investment returns.
Standard Life Plc (SL/), the Scottish insurer that boosted its cash
surplus by moving into pension products that require holding
less capital, said today it will pay a special dividend after
reporting a 65 percent gain in annual profit.

Wilson aims to boost Aviva’s earnings by generating cash in
the firm’s developed markets, such as the U.K., Canada and
France, saying that will both pay the dividend and fund growth
in emerging economies including Poland, Turkey and Singapore.

Cash flow needs to be “as predictable as a Swiss clock,”
he told reporters. “There are parts of Europe, interestingly
enough, that have some of the same dynamics as Asia. Some of the
markets we’re strong in, like Poland and Turkey, have good gross
domestic product growth.”

McFarlane Plan

Aviva’s strategy is similar to that of Prudential Plc (PRU), the
U.K.’s biggest insurer by market value, which has almost doubled
its share price since 2011 by using its British arm’s cash and
credit rating to fund expansion in south-east Asia.

Wilson took over seven months after his predecessor, Andrew Moss, stepped down following a shareholder revolt over his pay,
and after Chairman John McFarlane unveiled a plan to sell or
wind down almost a third of the insurer’s businesses. McFarlane
focused on raising capital, paying down debt and making Aviva
less susceptible to market movements as European leaders
struggled to contain the region’s fiscal crisis.

“We now have to take Aviva to the next stage of this
turnaround,” Wilson told reporters. “We will focus the
business on cash flows.”